Making Your Money Last

Should You Spend More on Family in Retirement?

Your challenge: Maintain financial security without sacrificing life experiences.

Last summer, my husband and I, along with my sister and her husband, went on a cruise to Alaska. I expected to see mostly older people on the ship marking a special anniversary (it was my sister’s 40th) or checking off a vacation that was high on their bucket list. To my surprise, there were a lot of family groups on board—financed, presumably, by generous grandparents treating their adult children and grandchildren to the trip of a lifetime. As the editor of a personal finance magazine, my first thought was, “Wow, that must be expensive.” That was followed quickly by, "Wow, Janet, someday it will be your turn to be the generous grandparent."

My epiphany continued later in the summer, when both of my married children told me they are expecting babies in the new year. When our kids were young, my husband’s parents always rented a house at the ocean for “family beach week” with their adult children and six grandchildren. We parents wheeled our babies on the boardwalk, and as the cousins grew up they made memories that they savor to this day. It suddenly hit me that it may be time for us to rent the beach house, while our kids and their cousins wheel their babies, who will grow up with memories of their own.

My husband was a bit taken aback by my burst of intergenerational largesse. After all, we’re still socking away money for retirement, and we’ve taken to heart the Kiplinger advice that we’re likely to need enough savings to see us through three decades of retirement. How could I even think about cruises and beach houses until we knew how much we’d need to cover our expenses? So it really hit home when I read the title of senior editor Jane Bennett Clark’s Rethinking Retirement column: "Retirees: It’s Okay to Spend."

Despite dire warnings that Americans face financial disaster in retirement because they’re saving too little, studies show that “most retirees of moderate means, as well as those who are affluent, don’t even spend all their income from Social Security, pensions and investment earnings, much less draw down their assets,” writes Jane.

In fact, according to a series of studies by Vanguard, retiree households with at least $100,000 in financial assets actually save, on average, 31% of their income from sources such as Social Security, pensions and retirement accounts. As for the venerable 4% rule—which stipulates that in order to make their money last, retirees should limit withdrawals to 4% of their assets each year, adjusted for inflation—the Vanguard report shows that retirees don’t even come close to withdrawing that much. The median withdrawal rate from financial accounts was 3% a year, and the median spending rate, which measures the portion of a withdrawal that’s actually spent, was even lower.

Of course, there’s always the concern that a long-term illness (or an unexpectedly long life) can eventually deplete your assets. The challenge is to be financially secure without shortchanging yourself or sacrificing family experiences that make life worth living. It seems to me that the first step is to be as accurate as you can be in matching your retirement income with your expenses—including big-ticket items such as an Alaskan cruise. To hedge against later-life disasters, you could purchase long-term-care insurance or buy a deferred-income annuity that would guarantee an income stream that starts 10 or 20 years in the future.

After mulling all this over, I’ve concluded that the cruise isn’t in the cards just yet (sorry, kids). But we’re all in for the beach house next summer.

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